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People and MarketsCommentGC View

A return to austerity would turn investors off UK


UK chancellor of the exchequer Rishi Sunak is preparing to unveil his latest budget on Wednesday. Leaks point to a package of tax hikes and spending cuts. But a repeat of the discredited model that the Conservative Party, of which he is a member, embraced to tackle the 2008-2009 financial crisis would miss a huge opportunity to finance growth just when borrowing costs are as low as they will ever be. Austerity will prove a false economy that drives investment elsewhere.

Sunak seems to be taking every opportunity to remind the UK public of the Conservative Party’s “sacred duty” to control spending, reign in government debt and “always balance the books”.

The last time the UK books were balanced was in 2000, under a Labour government after a period of rapid economic growth in the 1990s.

Sunak seems concerned about the cost of servicing the debt pile should interest rates climb, but investors do not share those these fears.

Their concerns are mostly centred on the fact that withdrawing the lavish government spending of the last year could cripple the UK economy.

In equity markets, investors have often abandoned Europe as a whole in recent years to buy US and Asian stocks. The driver of these flows has been economic growth — a lack of it in Europe compared to elsewhere.

While equity valuations have outstretched business performance these are still places where growth is being generated in contrast to Europe where a slavish dedication to balancing books has left investors uninterested in vast swathes of the listed market.

In fact, the meteoric popularity of a crop of European tech IPOs in 2021 is a sign of how desperate investors in both continental Europe and the UK are for exposure to growth businesses. Sunak should heed this and put in place government policy that encourages growth across the UK economy rather than stifles it.

Despite Brexit and a pledge to be global in its outlook, the government is singing the old tune of austerity at a time when the US is engaging in $1.9tr of stimulus. It is hard to see investment flows returning across the Atlantic should Sunak continue on his mission to balance the books above all else.

Growth the only option

Reducing public spending and raising corporation tax at a time when UK businesses are desperately trying to last until vaccines allow the economy to restart is obviously ham-fisted.

Despite the rise in Gilt yields over the past few weeks, the UK’s borrowing costs remain excellent on a historical basis. With the support of the Bank of England, the Debt Management Office has done an excellent job of providing the vast sums necessary to support the economy through its crisis.

Yes, rates can rise, but they will likely do so gradually and not without warning. The economic consequences of a return to austerity are far clearer and more present dangers.

The 10 years of former chancellor George Osborne’s austerity budgets saw the UK’s budget deficit fall from 8.7% to 1.8%, but debt climbed from just over £1.1tr in 2010 to £1.8tr at the start of 2020. Although the books were never balanced, the reduction in spending was enough to slow GDP growth and the country’s debt-to-GDP ratio climbed from 69.3% to 80.7%.

Austerity flopped and anything the government does that looks like it will hamper growth will also hamper investment.

The book is written on this topic. The UK’s only way out of the hole is going for growth.